Why Philanthropy Needs Reinventing

Americans donate over $300 billion annually to nonprofits, averaging about $1,000 per person. We feel good when we give to our favorite charities. At the same time, philanthropy is broken, and almost everyone knows it.

The causes that receive the most donations are not typically the ones that make the greatest impact. Instead, the personal whims and preferences of donors determine where dollars flow. People pick charities based more on reputation and trust than proven effectiveness. Many donors do not know how to define a "high performing" nonprofit, let alone how to identify one or assess whether there are more worthy charities. Donors respond to inspirational anecdotes in professionally-written fundraising material rather than asking for meaningful evidence of performance; simultaneously, they express concerns about high overhead costs and program effectiveness. Philanthropy is broken, and it needs to be reinvented.

But how? There are three key areas that can create a domino effect of improving charitable giving.

1. There must be greater honesty about charitable giving. Although the media often report on fraud and waste in the charitable world, that is not my biggest concern. The larger issue is more common and subtle. Today's dominant paradigm of giving is centered around the emotional fulfillment of donors. Donors give to the causes they care about and have personal ties to--the university they attended, the nonprofit searching for a cure to an illness that touched their lives, or the organization promoting the type of art or music they enjoy. This type of giving itself is not dishonest; the lack of truthfulness is that few people acknowledge that giving based on the donor's personal, unresearched whims dramatically reduces the impact of the gift. While these are "good" causes, this type of giving is very different from trying to make the biggest dent in the areas that are most effective at helping others.

Is philanthropy supposed to be about pursuing the personal passions of the donor or helping those in need? If it is the latter, then shouldn't a central tenet be to try to provide the greatest benefits possible? In this case, such donor-driven strategies should be widely regarded as failed philanthropy.

Being honest is more than just not lying; it requires a level of frankness. Not every good cause is equally good, and not every donor is equally deserving of praise. As long as the philanthropic community views those who donate millions to their favorite opera houses to be as generous as those who help the poorest people in the world, there is a lack of honesty. We should reserve the highest public praise for donors with the most impact-driven approaches. This type of honesty would lead donors to be less whimsical and more thoughtful about their giving choices.

2. There must be better ways for donors to evaluate nonprofits. Although there are several charity rating agencies, their weaknesses are often so glaring as to make them virtually useless. Most focus predominantly on financial metrics such as the percentage of donations going to fundraising and overhead costs. This is far from a good measure of performance--just because a charity only spends 10% on fundraising and overhead costs doesn't mean the programs funded by the remaining 90% are effective. The largest of the charity rating agencies, Charity Navigator, is trying to incorporate whether nonprofits report results, but that won't occur until 2016 at the earliest . Even then, Charity Navigator will only address whether charities report results--not evaluate whether the results are actually good--which will take even more time. When that happens, hopefully they will be more selective than today; giving their top four-star rating to over 2000 charities waters down the value of their ratings and expresses little conviction about what works best. The bottom line is that these rating agencies can be counterproductive to their own missions, as they give donors a false sense of confidence when providing high ratings for charities that may not be very effective.

There are only a small number of charity evaluators that focus on effectiveness and present their views of the best of the best charities; the most notable is GiveWell. More of these evaluators, as well as a higher profile for the existing ones, would go a long way to make charitable giving more effective. Such charity evaluators will develop and thrive as donors express more interest in them.

3. Donors must take more responsibility for the impact of their giving. According to a study by Hope Consulting, only 35% of donors do any research before giving, and only 9% do more than two hours of research. Instead of giving with all "heart" and no "head," a better balance is needed. Donors must think about not just what causes tug at their hearts, but also what are the greatest problems and where are charities likely to make the biggest impact. The irony is that as donors make their giving decisions based less on emotional appeals and more on evidence about what works best, the increased conviction they have in their giving will ultimately provide even greater emotional satisfaction.

A reinvented, better world of philanthropy will not happen overnight. But it can happen gradually, as one donor at a time takes responsibility for their own giving.